Vacation pay is an optional employee benefit which is chosen by the employer. However, if the employer chooses to offer vacation pay, they must comply with certain laws and regulations. Vacation pay is technically considered a form of wages, since it is earned based on the number of hours worked. Therefore, a contract between the employer and employees is created which bounds the employer to certain laws. Although the employer can set a cap on the amount of unused vacation time, instigating a “use-it-or-lose-it” policy is not allowed.
Employers must allow employees to use earned vacation, or they can compensate employees with vacation pay for those hours not used. Of course, employers are permitted to put a limit on the amount of vacation time used at any one point of time. When employers offer vacation pay instead of actual time off in order to prevent vacation time from being carried over from year to year, all terms agreed upon must be followed.Upon termination or voluntary departure of an employee, the employer is required to compensate him or her for all unused vacation pay due to the fact that vacation pay is considered a form of wages. Even if the employee was not yet eligible to use that vacation time, he or she must still be paid for all vacation pay earned up to that point. For example, employees may start earning vacation time immediately after the date of hire, but be required to work for a year before using any vacation. Still, if the employee is terminated or quits after six months, the employer must compensate him of her for all vacation pay earned within those first six months.